If there’s one question gold “bears” have a hard time answering, it’s this:
If gold is such a “barbarous relic,” how come central banks are acquiring it these days?
There’s doesn’t seem to be much doubt this accumulation is taking place. In fact, Izabella Kaminska wrote on the FT Alphaville blog on the Financial Times (UK) website just today:
What’s more, the case for “gold” is increasingly being linked to future expectations that central banks and public authorities will continue to be large net buyers and borrowers of gold, rather than sellers.
The point is made nicely in this note from Moody’s Analytics on Tuesday:
One strong positive for gold demand is purchases for the reserves of governments and supranational organizations. After many years of shedding reserves, net buying by the official sector reached 456 t last year. The desire to diversify from major currencies may continue to drive such demand…
So, which central banks in particular are acquiring the precious metal?
I recently received this month’s edition of Peter Schiff’s Gold Report (ROTW back on July 6, 2011) and the President and Chief Global Strategist of Euro Pacific Capital provided some insight. From the July issue of this free newsletter:
The return to gold is unmistakably the product of a strategic, not merely a tactical, shift in global central banking policy. Central banks in the developed world have now altogether stopped selling bullion. This was foreshadowed by their behavior over the past decade, when they sold even less gold than they were permitted to under the anti-dumping Central Bank Gold Agreements. Clearly the concern about dumping gold was out of step with the trend. But more importantly, central banks in the emerging markets have been buying gold by the truckload.
Since the financial crisis of ’08, nations as diverse as Mexico, the Philippines, Thailand, Kazakhstan, Turkey, Ukraine, Russia, Saudi Arabia, and India have led the way back to gold as a primary reserve asset. Russia alone has added an impressive 400 tonnes of bullion to its reserves, most of it coming from domestic purchases. Mexico has added over 120 tonnes, including 78 tonnes from one mega-purchase in March 2011. The Philippines have bought over 60 tonnes, with 32 tonnes coming in as recently as March 2012. Thailand has added approximately 60 tonnes, and Kazakhstan just shy of 30 tonnes. Turkey amended its regulatory policy late last year to allow commercial banks to count gold towards their reserve requirements, adding over 120 tonnes to its official reserves. And bullion imports into mainland China through Hong Kong have been reaching all-time highs.
Finally, loyal US allies Saudi Arabia and India, in what is sure to leave particularly bitter taste in Washington’s mouth, have been adding gold to their reserves by the hundreds of tonnes.
In short, the governments of emerging markets recognize that the global monetary order is on the verge of a reset. These emerging markets are the economic engines of the 21st century, and they’re determined not to be undermined by Western fiat paper.
South Korea might also be adding to their gold reserves soon. I blogged on June 21:
The Irish precious metals firm also highlighted the possibility of South Korea buying more gold in 2012:
The Bank of Korea has said that its current gold holdings are too small and that the BOK may buy more gold this year in order to diversify its foreign exchange portfolio which is exposed to the dollar.
Eugene Kim, chief investment officer at the central bank’s foreign-exchange reserve management group, said its gold holdings are “too small” given the size of its forex reserves, which stood at a record-high of $310.87 billion at the end of May, and that the BOK might buy more bullion this year.
Gold. A “barbarous relic” for sure.
(Editor’s note: I am not responsible for any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein)
Kaminska, Izabella. “Propping up the gold price.” FT Alphaville. 10 July 2012. (http://ftalphaville.ft.com/blog/2012/07/10/1077461/propping-up-the-gold-price/). 10 July 2012.
Schiff, Peter. “The Return Of The Gold Standard.” Peter Schiff’s Gold Report. July 2012.
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